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Learn Together

This note was originally published at 8am on November 15, 2012 for Hedgeye subscribers.

“We can do anything if we do it together.”

-William S. Knudsen, 1938

 

That’s how great business men and women think. Since its their own capital at risk, they know that the only way to win is through trust, teamwork, and collaboration. Markets didn’t see any of that from President Obama yesterday. Markets have a vote too.

 

The aforementioned quote comes from the beginning of Chapter 3 in Freedom’s Forge, “The World of Tomorrow.” Pre WWII, Post Depression, was arguably the greatest period of collaboration between competent US Business leaders and Washington in US history. Unfortunately, it took a crisis for politicians to cooperate with credible business sources. Maybe we need another.

 

From both a global growth and US earnings cycle perspective, this is not the late 1930s. “In 1939, the American steel industry was at its lowest capacity in twenty years” (page71). Today, American corporate profit margins are coming off all-time peaks. If Romney Republicans and Democrats alike are being advised by Neo-Keynesians, don’t expect them to get what I see. They haven’t all year.

 

Back To the Global Macro Grind

 

Setting aside the money printing thing (and investors being forced to chase stocks into their April and September tops), the biggest Global Macro Research call of 2012 has to be Global Growth surprising on the downside.

 

Since piling more debt-upon-debt-upon-debt structurally impairs long-term economic growth (Reinhart & Rogoff 101), this really shouldn’t have surprised as many economists and strategists as it did.

 

Like Americans of the late 1930s, we need to evolved our risk management, modeling, and forecasting processes. We need more doers advising Washington – less talkers. They do not know what they don’t know.

 

Risk happens fast…

 

The SP500 snapped our long-term TAIL line of 1364 yesterday and then quickly drew-down another 9 handles to close the day down another -1.4%. From The Bernanke Top, that puts the SP500’s correction at -8.1% (Russell 2000 down -10.5%). That’ll leave a mark.

 

But what have we learned? How many more times do you want to go through this? Japan has been doing it for 20 years and is now quadrupling-down on the same monetary policy that has not worked.

 

The Japanese Yen is getting hammered again this morning as the leader of the LDP (Abe) is begging for “unlimited easing” going into Japan’s December 16th election. Don’t blame them – they are doing precisely what Princeton and Yale taught them to do.

 

So, down Yen = up Dollar… and the Correlation Risk associated with Strong Dollar is on:

  1. US Dollar up for the 8th of the last 9 weeks (bullish TREND – see Chart of The Day)
  2. Euro snaps TREND line support of $1.28 (EUR/USD)
  3. Yen drops back into a Bearish formation at $81.22 (USD/JPY)

I know, I know – I should be whining about the US fiscal cliff this morning. Not. With Italian GDP -2.4% y/y in Q3 and France seeing the fruits of a socialist Hollande vote (going into a recession), do not forget that the rest of the world’s fiscal and monetary risks do not cease to exist. They’re all going off the #KeynesianCliff now.

 

We all knew this would end badly. So don’t tell me “stocks are cheap” if you use the wrong numbers. You are better than that. Tell me you’ve learned something since the October of 2007 all-time high in US Equities and proactively prepared for this moment.

 

Across our core risk management durations, here’s why I am more bearish today than I was yesterday:

  1. CHINA – Shanghai Composite down another -1.3% overnight to a 1 month low (-17.5% since #GrowthSlowing began)
  2. JAPAN – Nikkei getting whipsawed by Hilsenrath like attempts to scare Equities higher, but remain -13.9% since March
  3. SOUTH KOREA – KOSPI down another -1.2% overnight almost back to flat YTD remains bearish TREND in our model
  4. GERMANY – DAX was the last holdout of the European majors; now snapping its 7118 TREND line
  5. SPAIN – stocks are trying to rally on another “request for bailout” rumor; that’s so Q2; IBEX is bearish TRADE and TREND
  6. RUSSIA – RTSI continues to crash (down -21.8% from the Global #GrowthSlowing top of March 2012)
  7. BRAZIL – Bovespa down another -2.1% yesterday, moves back into the red YTD (bearish TAIL remains)
  8. CANADA – TSX Composite cracked its TREND support of 12,131 this week, down -1.6% yesterday post Obama’s presser

Sure, that’s just a snapshot of globally interconnected risk across the majors of Global Equity markets. But guess what – if you look at what’s happening in Commodities and Currencies, from a volatility perspective, it’s even worse.

 

We’ve said this for a very long time, and I’ll say it again this morning – the USD arresting a 40-year decline is the most asymmetric risk that can occur, across asset classes, to what you’ve been used to for the last 10 years of your investing life.

 

Yes, there’s a lot going on. It’s a lot of hard and humbling analytical work to contextualize – which makes it next to impossible if the media and political elite refuse to acknowledge our voices. Rise up, and help us help them understand this together.

 

Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1748, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1346-1364, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Learn Together - Chart of the Day

 

Learn Together - Virtual Portfolio


Housing: Positive Notes

Investors love to focus on a single catalyst and this morning's negative New Home Sales number certainly fits the bill. Negativity aside, Hedgeye Financials Sector Head Josh Steiner notes that there are two positive data points that indicate the housing market is improving.

 

Housing: Positive Notes - housingmarket1

 

Firstly, household formation rates continue to accelerate,  having improved meaningfully since the second quarter of 2011. September and October in particular show improvements worth mentioning; from October 2011 to October 2012 there were 2.192 million new households formed. Household growth tends to be a good economic indicator and while Americans may say they're less confident, the data says otherwise.

 

Housing: Positive Notes - housingmarket2

 

Focusing on New Home Sales, new homes sold in October were 368k (seasonally adjusted annual rate), down 0.3% month-over-month versus September's rate of 369k. On a year-over-year basis, October rose 12% versus September's change of 18.6% for the same time period. Over the long-term, new home sales are highly correlated with housing starts with the occasional mismatch. These starts are strong and show improvement in housing despite the New Home Sales number that came out this morning.

 

Housing: Positive Notes - housingmarket3

 

Housing: Positive Notes - housingmarket4


Bounce, Fail: Rebar Prices Falling Again - CAT

Takeaway: Sustained weakness in Chinese construction-related commodity prices are flashing a warning to $CAT investors. Coal & Energy are also a risk.

Bounce, Fail: Real Chinese Steel Rebar Prices Falling Again

 

 

  • Real Rebar Prices:  The Hedgeye Industrials team often finds local commodity price data easier to use than Chinese economic figures.  Significant global industrial resources are devoted to supplying China’s fixed asset investment (FAI) boom.  Tracking construction-related commodity prices, like domestic rebar prices adjusted for inflation, may provide us with timely information on Chinese activity.   

 

Bounce, Fail: Rebar Prices Falling Again - CAT - 1

 

 

  • Negative Indicator for Chinese FAI:  Real rebar prices are ~4% below 2009 lows, which is not a good signal for mining capital investment or Chinese construction activity, in our view.
  • Currency Relationship:  China pegs its currency to the USD and commodity prices are often responsive to currency moves.  Chinese rebar prices show a modest negative correlation to the USD Index.  

 

Bounce, Fail: Rebar Prices Falling Again - CAT - 2

 

  • Residual Suggests Sustained Weakness:  Looking at moves in excess of those driven by currency (the residual of the regression to the USD Index), we see cause for concern in the Chinese construction related steel markets.  The residual has been below its currency implied value for several months and is rising again.

 

Bounce, Fail: Rebar Prices Falling Again - CAT - 3

 

  • CAT Exposed:  We believe Caterpillar is exposed to the potential popping of the mining capital investment bubble, which was in large part inflated by Chinese FAI.  CAT has acquired mining related businesses and invested in production capacity for mining equipment at what we believe is (roughly) a cycle peak.
  • Coal & Energy Capex Additional CAT Concerns:  Global adoption of innovative gas extraction techniques may result in long-term weakness in coal mining capital investment.  As we wrote on Monday in Overweight Capital Goods?  Wrong Question, But Probably Not, growth in energy related capital investment is already elevated (chart courtesy Kevin Kaiser, Hedgeye Energy).
  • CAT Risky, In Our View:  We continue to think that the downside risks in CAT are not reflected in the current share price.

 

Bounce, Fail: Rebar Prices Falling Again - CAT - 4

 

 

 

 

 

Jay Van Sciver, CFA

Managing Director


HEDGEYE RISK MANAGEMENT
120 Wooster St.

New York, NY 10012


 

 

 

 

 

 

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Athletic FW & Apparel Update Post Sandy

Takeaway: We remain positive on the space and the R&D driven cycle benefitting key players – NKE, FL, and FINL (long); UA (short near-term).

Athletic Footwear and Apparel sales continue to improve following Sandy related disruptions in early November. In addition, the setup for both footwear and apparel gets increasingly more favorable through year-end.


Pricing remains healthy up MSD-HSD, reflecting the increasing mix shift towards basketball footwear in light of last year’s NBA strike as well as efforts to offset apparel costs.


The key brands of note continue to be Nike, Brand Jordan, Adidas, Under Armour, as well as VFC’s The North Face. We remain positive on the space and the R&D driven cycle benefitting key players – NKE, FL, and FINL (long); UA (short near-term).

 

Athletic FW & Apparel Update Post Sandy - FW App table

 

Athletic FW & Apparel Update Post Sandy - App FW 1yr

 

Athletic FW & Apparel Update Post Sandy - App FW 2yr

 

Athletic FW & Apparel Update Post Sandy - FW sales

 

Athletic FW & Apparel Update Post Sandy - FW mk sh

 

Athletic FW & Apparel Update Post Sandy - App Sales

 

Athletic FW & Apparel Update Post Sandy - App Mktsh


Lower-Highs: SP500 Levels, Refreshed

POSITIONS: Long Bonds (FLAT), Long US Dollar (USD); Short Industrials (XLI) and Utilities (XLU)

 

At the beginning for the year, the bull case was growth “is back” – then, as growth slowed, it was earnings (“stocks are cheap”, using the wrong numbers). And earnings slowed. Now the bull case is government.

 

Great.

 

Across our core risk management durations, here are the lines that matter to me most:

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance = 1406
  3. Long-term TAIL support = 1364

In other words, the Risk Range across durations is widening as the expectation for more government catalysts are heightening.

 

Waiting on Obama to speak,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Lower-Highs: SP500 Levels, Refreshed - SPX


Bulls, Bears and BRICs

We're pleased to present the question and answer session from this morning's investment call held for subscribers. Hedgeye CEO Keith McCullough discusses the slowdown occurring in BRIC countries (Brazil, Russia, India, China), noting that China's equity market has declined double digits over the last three years. Russia is without a doubt the worst market right now with high beta and a rough investing climate. Also discussed is bullish and bearish sentiment in the market and the Shanghai and Hang Send Indices. You can listen to the full audio from our Q&A session below.

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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